Our Business
Greatbatch, Inc. is a leading developer and manufacturer of critical products used in medical devices for the cardiac rhythm management ("CRM"), neuromodulation, vascular, orthopaedic and interventional radiology markets. Additionally, Greatbatch, Inc. is a world leader in the design, manufacture and distribution of electrochemical cells, battery packs and wireless sensors for demanding applications in markets such as energy, security, portable medical, environmental monitoring and more. When used in this report, the terms "we," "us," "our" and the "Company" mean Greatbatch, Inc. and its subsidiaries. We believe that our proprietary technology, close customer relationships, multiple product offerings, market leadership and dedication to quality provide us with competitive advantages and create a barrier to entry for potential market entrants.

We operate our business in two reportable segments - Greatbatch Medical and Electrochem Solutions ("Electrochem"). During the first quarter of 2009, we rebranded our Implantable Medical Component ("IMC") segment as Greatbatch Medical. The Greatbatch Medical segment designs and manufactures components and devices for the CRM, Neuromodulation, Vascular Access and Orthopaedic markets. These include batteries, capacitors, filtered feedthroughs, engineered components and enclosures used in Implantable Medical Devices ("IMDs") and more recently hip and knee replacement, trauma and spine as well as hip and shoulder implants and introducers, catheters, implantable stimulation leads and microcomponents. Additionally, the Greatbatch Medical business offers value-added assembly and design engineering services for products that incorporate Greatbatch Medical components.

Electrochem is a world leader in the design, manufacture and distribution of electrochemical cells, battery packs and wireless sensors for demanding applications in markets such as energy, security, portable medical, environmental monitoring and more.

Our Customers
Our Greatbatch Medical customers include leading Original Equipment Manufacturers ("OEM"), in alphabetical order here and throughout this report, such as Biotronik, Boston Scientific, DePuy, Johnson & Johnson, Medtronic, Smith & Nephew, the Sorin Group, St. Jude Medical, Stryker and Zimmer Holdings, Inc. The nature and extent of our selling relationships with each Greatbatch Medical customer are different in terms of breadth of products purchased, purchased product volumes, length of contractual commitment, ordering patterns, inventory management and selling prices. During the first quarter of 2009, Boston Scientific, Johnson & Johnson, Medtronic and St. Jude Medical collectively accounted for 59% of our total sales.

Our Electrochem customers are primarily companies in markets such as energy, security, portable medical and environmental monitoring including Halliburton Company, Weatherford International, General Electric, Thales, Zoll Medical Corp. and Scripps Institution of Oceanography.

Financial Overview
Consolidated sales in the first quarter of 2009 were $139.8 million, an increase of 14% over the comparable 2008 period. This growth was driven by CRM and Neuromodulation revenue and the benefit of a full quarter of Orthopaedic operations ($8 million) as compared to the first quarter 2008. Partially offsetting these increases were lower Electrochem revenue due to a slow-down in the energy markets and approximately $3 million of foreign currency impact on our Orthopaedic sales. Organic constant currency growth for the quarter was approximately 10%. Our revenue is significantly impacted each quarter due to the timing of various customer product launches, shifts in customer market share, customer inventory management initiatives as well as marketplace field actions.

Operating income increased to $14.8 million for the first quarter of 2009 compared to a loss of $4.1 million for the first quarter of 2008. Operating income for the first quarter of 2009 included $2.8 million of acquisition related charges, consolidation costs and integration expenses compared to $1.0 million for the same period in 2008. We have initiated various consolidation initiatives aimed at streamlining our operations and improving operating profitability. The progress made on these initiatives can be seen by the improvement in operating margin since the first quarter of 2008.

As of the end of the first quarter of 2009, cash and cash equivalents totaled $15.1 million. These funds along with the cash generated from operations and the $104 million available under our line of credit are sufficient to meet our operating and investment activities for the foreseeable future, including the cash expenditures relating to our consolidation initiatives. During the first quarter of 2009, we repaid $1 million of our long-term debt as, consistent with our expectations, cash flows from operations for the first quarter of 2009 were approximately break-even due to a one-time contractual raw material inventory purchase related to the acquisition of our Chaumont France facility.

Our CEO's View
This was another solid quarter for Greatbatch, as we continued the momentum with which we finished 2008. Our revenue growth was driven by our Greatbatch Medical division, and is a result of the progress we have made on our strategic goals. The integration of our acquisitions continues to benefit the Company, including higher growth in new markets and cross selling opportunities across a broader customer base. Additionally, we launched a new branding initiative to unify our existing businesses under a common vision and consolidated our medical entities under a single brand - "Greatbatch Medical."

While we certainly are not immune to the impact of the strained economic environment, particularly as evidenced by the pressure on our Electrochem business, our performance demonstrates the success of our balanced approach to diversifying our revenue base, continuously generating value through operating performance improvements, and delivering innovative new products to our customers.

Product Development
Currently, we are developing a series of new products for customer applications in the CRM/Neuromodulation, Vascular Access, Orthopaedic and commercial power markets. Some of the key development initiatives include:

1. Continue the evolution of our Q series high rate ICD batteries;

2. Continue development of MRI compatible components;

3. Continue development of higher energy/higher density capacitors;

4. Integrate Biomimetic coating technology with therapy delivery devices;

5. Complete design of next generation steerable catheters;

6. Further minimally invasive surgical techniques for orthopaedics industry;

7. Develop disposable instrumentation;

8. Provide wireless sensing solutions to Electrochem customers; and

9. Develop a charging platform for commercial secondary offering.

Approximately $2.3 million of the BIOMEC, Inc. ("BIOMEC") acquisition purchase price in April 2007 was allocated to the estimated fair value of acquired in-process research and development ("IPR&D") projects that had not yet reached technological feasibility and had no alternative future use as of the acquisition date. The value assigned to IPR&D relates to projects that incorporate BIOMEC's novel-polymer coating (biomimetic) technology that mimics the surface of endothelial cells of blood vessels. An agreement was reached in 2008 with an OEM partner to provide coating material and services for their catheter products. The 510(k) application was submitted to the Food and Drug Administration ("FDA") and we received clearance to market this product during the first quarter of 2009. There have been no significant changes from our original estimates with regard to these projects.

Approximately $13.8 million of the Enpath Medical, Inc. ("Enpath") acquisition purchase price in June 2007 was allocated to the estimated fair value of acquired IPR&D projects that had not yet reached technological feasibility and had no alternative future use. These projects primarily represent the next generation of introducer and catheter products already being sold by Enpath which incorporate new enhancements and customer modifications. One introducer project was launched near the end of 2008. We expect to commercially launch the other introducer products under development in 2009 which will replace existing products. These introducer projects acquired have been delayed due to timing of customer adoption and transition and technical difficulties of some of the projects. Additionally, future sales from our ViaSealTM introducer project have been enjoined due to litigation (See "Litigation"). The catheter IPR&D project, to which a portion of the Enpath purchase price was allocated, has been put on hold indefinitely in order to allocate resources to other projects. These delays in introducer and catheter projects are not expected to have a material impact on our results of operations.

Approximately $2.2 million of the P Medical Holding SA ("Precimed") acquisition purchase price was allocated to the preliminary estimated fair value of acquired IPR&D projects that had not yet reached technological feasibility and had no alternative future use. The value assigned to IPR&D related to Reamer, Instrument Kit, Locking Plate and Cutting Guide projects. These projects primarily represent the next generation of products already being sold by Precimed which incorporate new enhancements and customer modifications. We commercially launched a portion of these products in 2008 and expect to launch others in 2009. Several of the other orthopaedic projects acquired have been delayed and two have been cancelled due to the timing of customer adoption, technical difficulties, inability to meet margin goals and feasibility assessments. These changes are not expected to have a material impact on operating income as these projects have lower margins associated with them.

Cost Savings and Consolidation Efforts
From 2005 to 2008, we recorded charges in other operating expenses related to our ongoing cost savings and consolidation efforts. Additional information is set forth in Note 10 - "Other Operating Expense" of the Notes to the Condensed Consolidated Financial Statements contained in this report.

2005 & 2006 facility shutdowns and consolidations - Beginning in the first quarter of 2005 and ending in the second quarter of 2006 we consolidated our medical capacitor manufacturing operations in Cheektowaga, NY, and our implantable medical battery manufacturing operations in Clarence, NY, into our advanced power source manufacturing facility in Alden, NY ("Alden Facility"). We also consolidated our capacitor research, development and engineering operations from our Cheektowaga, NY facility into our technology center in Clarence, NY.

In the first quarter of 2005, we announced our intent to close our Carson City, NV facility and consolidate the work performed at that facility into our Tijuana, Mexico facility. That consolidation project was completed in the third quarter of 2007.

In the fourth quarter of 2005, we announced our intent to close our Columbia, MD facility ("Columbia Facility") and Fremont, CA Advanced Research Laboratory ("ARL"). We also announced that the manufacturing operations at our Columbia Facility would be moved into our Tijuana Facility and that the research, development and engineering and product development functions at our Columbia Facility and at ARL would relocate to our technology center in Clarence, NY. The ARL portion of this consolidation project was completed in the fourth quarter of 2006. The Columbia Facility portion of this consolidation project was completed in the third quarter of 2008.

During the fourth quarter of 2006, we completed a plan for consolidating our corporate and business unit organization structure. A significant portion of the annual savings from this initiative was reinvested into research and development activities and business growth opportunities.

The total cost of these projects was $24.7 million, which was incurred from 2005 to 2008, and included the following:

a. Severance and retention - $7.4 million;

b. Production inefficiencies, moving and revalidation - $4.6 million;

c. Accelerated depreciation and asset write-offs - $1.1 million;

d. Personnel - $8.4 million; and

e. Other - $3.2 million.

All categories of costs were considered to be cash expenditures, except accelerated depreciation and asset write-offs. All costs incurred during the first quarter of 2008 were included in the Greatbatch Medical business segment.

2007 & 2008 facility shutdowns and consolidations - In the first quarter of 2007, we announced that we would close our Electrochem manufacturing facility in Canton, MA and construct a new 81,000 square foot replacement facility in Raynham, MA. This initiative was not cost savings driven but capacity driven for the Electrochem group and was completed in the first quarter of 2009.

In the second quarter of 2007, we announced that we would consolidate our corporate offices in Clarence, NY into our existing research and development center also in Clarence, NY after an expansion of that facility was complete. This expansion and relocation was completed in the third quarter of 2008.

During the second and third quarters of 2008, we reorganized and consolidated various general and administrative and research and development functions throughout the organization in order to optimize those resources with the businesses we acquired in 2007 and 2008.

In the second half of 2008, we ceased manufacturing at our facility in Suzhou, China, which was acquired from Engineered Assemblies Corporation, and closed our leased manufacturing facility in Orchard Park, NY, which was acquired from IntelliSensing LLC. Additionally, we consolidated our Saignelegier, Switzerland manufacturing facility, which was acquired from Precimed. The operations of these facilities were relocated to existing facilities that had excess capacity. The facility in China is being used as a procurement office.

In the fourth quarter of 2008, we approved a plan for the closure of our Teterboro, New Jersey (Electrochem manufacturing), Blaine, Minnesota (Vascular Access manufacturing) and Exton, Pennsylvania (Orthopaedics corporate office) facilities. The operations at these facilities will be moved to other existing facilities with excess capacity.

The above initiatives are expected to be completed over the next nine months. The total cost for these facility shutdowns and consolidations is expected to be approximately $14.2 million to $17.5 million, of which $10.8 million has been incurred through April 3, 2009.

The major categories of costs include the following:

a. Severance and retention - $4.5 million to $5.5 million;

b. Production inefficiencies, moving and revalidation - $3.0 million to $4.0 million;

c. Accelerated depreciation and asset write-offs - $3.5 million to $4.0 million;

d. Personnel - $1.2 million to $1.5 million; and

e. Other - $2.0 million to $2.5 million.

All categories of costs are considered to be cash expenditures, except accelerated depreciation and asset write-offs. For the first quarter of 2009, costs relating to these initiatives of $1.0 million and $0.9 million were included in the Greatbatch Medical and Electrochem business segments, respectively. All costs incurred during the first quarter of 2008 were included in the Electrochem business segment.

Our Financial Results
We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st. For 52-week years, each quarter contains 13 weeks. The first quarter of 2009 and 2008 ended on April 3, and March 28, respectively. The commentary that follows should be read in conjunction with our Condensed Consolidated Financial Statements and related notes and with the Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K for the fiscal year ended January 2, 2009.

During the first quarter of 2009, we were required to adopt Financial Accounting Standards Board ("FASB") Staff Position ("FSP") APB 14-1, "Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion (Including Partial Cash Settlement)." This FSP requires issuers of convertible debt instruments that may be settled in cash upon conversion, such as the Company's CSN II as described in Note 6 to the Condensed Consolidated Financial Statements contained in this report, to separately account for the liability and equity components of those instruments in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP requires retrospective restatement for all prior periods presented in financial statements. Accordingly, the 2008 Condensed Consolidated Financial Statements presented in this report have been retroactively adjusted to reflect the accounting for FSP APB 14-1 as if it were in effect as of the date CSN II was originally issued. See Note 2 to the Condensed Consolidated Financial Statements.

                                              Three months ended
                                           April 3,      March 28,          $             %
In thousands, except per share data          2009           2008         Change         Change
Greatbatch Medical
CRM/Neuromodulation                        $  77,267     $   65,164     $  12,103             19 %
Vascular Access                               10,733          9,567         1,166             12 %
Orthopaedic                                   34,083         27,786         6,297             23 %
Total Greatbatch Medical                     122,083        102,517        19,566             19 %
Electrochem                                   17,735         19,637        (1,902 )          -10 %
Total sales                                  139,818        122,154        17,664             14 %
Cost of sales - excluding amortization
of intangible assets                          93,954         93,745           209              0 %
Cost of sales - amortization of
intangible assets                              1,700          1,710           (10 )           -1 %
Total Cost of Sales                           95,654         95,455           199              0 %
Cost of sales as a % of sales                   68.4 %         78.1 %                       -9.7 %

Selling, general, and administrative
expenses (SG&A)                               18,687         18,347           340              2 %
SG&A as a % of sales                            13.4 %         15.0 %                       -1.6 %

Research, development and engineering
costs, net (RD&E)                              7,875          9,224        (1,349 )          -15 %
RD&E as a % of sales                             5.6 %          7.6 %                       -2.0 %

Other operating expense, net                   2,803          3,268          (465 )          -14 %
Operating income (loss)                       14,799         (4,140 )      18,939            N/A
Operating margin                                10.6 %         -3.4 %                       14.0 %

Interest expense                               4,889          5,078          (189 )           -4 %
Interest income                                  (25 )         (396 )         371             94 %
Other (income) expense, net                      207         (1,457 )       1,664            N/A
Provision (benefit) for income taxes           3,064         (2,920 )       5,984            N/A
Effective tax rate                              31.5 %         39.6 %                       -8.2 %

Net income (loss)                          $   6,664     $   (4,445 )   $  11,109            N/A
Net margin                                       4.8 %         -3.6 %                        8.4 %
Diluted earnings (loss) per share          $    0.28     $    (0.20 )   $    0.48            N/A

Sales

Greatbatch Medical - The nature and extent of our selling relationship with each OEM customer is different in terms of component products purchased, selling prices, product volumes, ordering patterns and inventory management. We have pricing arrangements with our customers that at times do not specify minimum order quantities. Our visibility to customer ordering patterns is over a relatively short period of time. Our customers may have inventory management programs and alternate supply arrangements of which we are unaware. Additionally, the relative market share among the OEM manufacturers changes periodically. Consequently, these and other factors can significantly impact our sales in any given period.

Our customers may initiate field actions with respect to market-released products. These actions may include product recalls or communications with a significant number of physicians about a product or labeling issue. The scope of such actions can range from very minor issues affecting a small number of units to more significant actions. There are a number of factors, both short-term and long-term, related to these field actions that may impact our results. In the short-term, if a product has to be replaced, or customer inventory levels have to be restored, component demand will increase. Also, changing customer order patterns due to market share shifts or accelerated device replacements may also have a positive or negative impact on our sales results in the near-term. These same factors may have longer-term implications as well. Customer inventory levels may ultimately have to be rebalanced to match demand.

Greatbatch Medical sales increased 19% for the first quarter of 2009 when compared to the same period of 2008. This growth was driven by CRM and Neuromodulation revenue and the benefit of a full quarter of Orthopaedic operations ($8 million) as compared to the first quarter 2008. Offsetting that increase was approximately $3 million of foreign currency impact on our Orthopaedic sales. Greatbatch Medical organic constant currency growth for the quarter was approximately 13%.

CRM and Neuromodulation revenue of $77.3 million for the quarter increased 19% over the prior year. The first quarter's results benefited from strong feedthrough, coated component and medical battery revenue partially offset by lower capacitor sales. CRM revenue is significantly impacted each quarter due to the timing of various customer product launches, shifts in customer market share, customer inventory management initiatives as well as marketplace field actions. Additionally, CRM revenue is impacted by the overall market growth for implantable devices. Given the current market conditions we anticipate that our customers will continue to aggressively manage inventory levels for the remainder of 2009. We continuously work with our customers to provide them cost effective technological advances to enable them to bring solutions to market, which ultimately drives our revenue growth.

First quarter revenues for the Vascular Access product line were $10.7 million, compared to the prior year quarter revenues of $9.6 million. This increase was primarily due to higher sales of introducer products due to customer inventory builds, which may impact revenues for the remainder of the year, partially offset by lower catheter revenue.

Orthopaedic product line revenues were $34.1 million for the quarter compared to $27.8 million for first quarter 2008. First quarter year over year comparisons for Orthopaedic sales include the benefit of a full quarter of revenues from the acquisitions completed during the first quarter of 2008 of approximately $8 million, partially offset by foreign currency exchange rate fluctuations of approximately $3 million and the effect of current market conditions. Orthopaedic sales during the first three quarters of 2008 benefited from the release of excess backlog that was on hand at the time of the Precimed acquisition, which has since been fulfilled.

Electrochem - We have pricing arrangements with our customers that many times do not specify minimum quantities. Our visibility to customer ordering patterns is over a relatively short period of time.

First quarter 2009 sales for the Electrochem business segment were $17.7 million, compared to $19.6 million in the first quarter of 2008. The decrease in sales was a result of current market conditions, which caused customers to reduce inventory levels and push back projects, primarily in our energy markets. We continue to actively manage our business so that we will be better suited to meet the needs of our customers once the markets recover.

2009 Sales Outlook - We continue to expect our full year 2009 sales will be in the range of $550 million to $600 million. This revenue projection assumes that we will continue to grow faster than our underlying market by leveraging our diversified revenue base and our strength in the development and manufacturing of custom technologies for our customers. These growth projections may be impacted by a variety of factors including a softening in the orthopaedic and commercial energy markets, potential delays in elective surgeries, the current financial market unrest, changes in exchange rates and changes in the health care reimbursement policies. Within the markets we serve, the orthopaedic market represents the least predictable market due to the elective nature of many of the surgeries and procedures in which our products are used.

Cost of sales

Changes from the prior year to cost of sales as a percentage of sales were primarily due to the following:

                                                                          Three months ended
                                                                             April 3, 2009
Inventory step-up amortization(a)                                                  -5.3%
Lower excess capacity (b)                                                          -3.7%
Foreign currency (c)                                                               -0.5%
Other                                                                              -0.2%
Total percentage point change to cost of sales as a percentage of sales            -9.7%

(a) In connection with our acquisitions in the first quarter of 2008 and fourth quarter of 2007, the value of inventory on hand was stepped-up to reflect the fair value at the time of acquisition. The amortization of inventory step-up, which is recorded as Cost of Sales - Excluding Intangible Amortization, was $6.4 million. As of the end of the first quarter of 2008, there was no additional inventory step-up remaining to be amortized.

(b) This decrease in cost of sales as a percent of sales is primarily due to lower excess capacity as a result of higher production of Greatbatch Medical products (mainly coated components and feedthroughs), which absorbed a higher amount of fixed costs such as plant overhead and depreciation. Additionally, . . .